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Sales Tax Exemptions: Are You Asking These Important Questions?

Diane L. Yetter

Tuesday, November 14, 2017

There are two sides to every story, and sales tax exemptions are no exception. It may appear that the person who holds the most responsibility for handling sales tax exemptions correctly is the person who is making the tax-exempt purchase. But as with all things sales tax, it is rarely that simple. Sellers who accept exemption certificates have responsibilities too. And on either side – whether you’re the purchaser or seller – not handling exempt transactions and exemption certificates correctly could lead to costly issues come audit time.

We’re going to reveal some of the questions you need to ask yourself if you handle exemption transactions, both for purchasers and sellers. Asking yourself these questions could be the first step towards making sure you or your business is compliant for sales tax exemptions.

Questions for Sellers who Handle Exempt Transactions

Ok, so you’re a seller. Exemptions are easy, right? If a purchaser wants to make a tax-exempt purchase, your sales representative or cashier gets the purchaser’s exemption certificate, and if everything looks good, the sales rep or cashier keys in the sale as tax exempt. Well, it’s not that simple.

If you’re a seller making exempt sales, these are some of the questions you need to ask:

How do you deal with name mismatches (i.e. when the name on the exemption certificate doesn’t match the name on the seller’s records)? Many sellers set up their customer master using a company’s dba name instead of the legal name. However, exemption certificates and sales tax registrations are in the legal name. This can create issues during audit for auditors that aren’t familiar with common dba’s.

How frequently do you make updates to catch changes in customers’ names and registration numbers? For example, if a purchaser changes from a corporation to an LLC, they may need to get a new sales tax registration number. If not, their exemption certificate may no longer be valid.

How much advice and direction do you give to customers when they’re filling out exemption certificates?

These questions are good starting points to get you thinking about changes you may need to make in your company protocol for handling exemption certificates.

Questions for Purchasers Making Exempt Purchases

Administering sales tax exemptions and exemption certificates is just as important for purchasers. There are quite a few issues that you’ll need to take into consideration if you make exempt purchases. Asking yourself the following questions can help you on your path to making sure you’re compliant.

Do you have a system to keep track of all the exemption certificates that your company sends out? It is vital to maintain good records of exemption certificates, so if you need to rescind a certificate due to a business or law change, you know which seller has one on file.

Who has the authority to issue exemption certificates in your business/organization? Keeping the authority to issue certificates limited to a few authorized employees can help ensure that you can easily track and maintain records of the certificates that have been issued.

What items should be listed on the certificate for what the exemption certificate covers – should the scope be broad or narrow?

Do you have a protocol in place to deal with sellers that can’t accommodate some purchases being taxable and some purchases being exempt?

These are some good questions to get you thinking about the scope of your responsibility as an exempt purchaser, but there are many other factors to take into consideration.